International Trade Theory

True / False Questions
 

1. (p. 161) Propagated in the 16th and 17th centuries, mercantilism advocated that countries should discourage both imports and exports.
FALSE

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-1
Topic: An Overview of Trade Theory
 

2. (p. 161) Free trade refers to a situation where a government attempts to influence through quotas or duties what its citizens can buy from another country, or what they can produce and sell to another country.
FALSE

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-1
Topic: An Overview of Trade Theory
 

3. (p. 161) Proposed in 1776, David Ricardo's theory was the first to explain why unrestricted free trade is beneficial to a country.
FALSE

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-1
Topic: An Overview of Trade Theory
 

4. (p. 161) According to Adam Smith, the invisible hand of the market mechanism, rather than government policy, should determine what a country imports and what it exports.
TRUE

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-1
Topic: An Overview of Trade Theory
 

5. (p. 161) Nineteenth century English economist David Ricardo popularized a laissez-fair stance of government towards trade.
FALSE

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-1
Topic: An Overview of Trade Theory
 

6. (p. 162) The great strength of the theories of Smith, Ricardo, and Heckscher-Ohlin is that they identify the specific benefits of international trade.
TRUE

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-1
Topic: An Overview of Trade Theory
 

7. (p. 162) A country's economy would gain only if its citizens buy products that are made in that country.
FALSE

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-1
Topic: An Overview of Trade Theory
 

8. (p. 163) During the 1980s, economist such as Paul Krugman developed what has come to be known as the new trade theory.
TRUE

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-1
Topic: An Overview of Trade Theory
 

9. (p. 164) The first theory of international trade emerged in England in the mid-16th century. Referred to as the theory of comparative advantage, its principle assertion was that gold and silver were the mainstays of national wealth and essential to vigorous commerce.
FALSE

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-2
Topic: Mercantilism
 

10. (p. 164) The main tenet of mercantilism was that it was in a country's best interests to maintain a trade surplus.
TRUE

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-2
Topic: Mercantilism
 

11. (p. 165) Zero-sum game refers to a situation in which an economic gain by one country results in an economic loss by another.
TRUE

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-2
Topic: Mercantilism
 

12. (p. 165) A positive-sum game refers to a situation in which major industrial nations can benefit even if some of them are able to benefit more than others.
FALSE

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-2
Topic: Mercantilism
 

13. (p. 165) If a country is more efficient than any other country in the production of a product, it has what is known as definitive advantage in the production of that product.
FALSE

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-2
Topic: Absolute Advantage
 

14. (p. 165) In his 1776 landmark book, "The Wealth of Nations," Adam Smith supported the mercantilist assumption that trade is a zero-sum game.
FALSE

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-2
Topic: Absolute Advantage
 

15. (p. 165) According to Adam Smith, countries should specialize in the production of goods for which they have an absolute advantage and then trade these for goods produced by other countries.
TRUE

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-2
Topic: Absolute Advantage
 

16. (p. 167-168) Ricardo's theory of competitive advantage says that it is logical for a country to specialize in the production of goods that it produces most efficiently and to export goods that it produces less efficiently.
FALSE

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-2
Topic: Mercantilism
 

17. (p. 170) The basic message of the theory of comparative advantage is that potential world production is greater with unrestricted free trade than it is with restricted trade.
TRUE

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-3
Topic: Comparative Advantage
 

18. (p. 170) Smith's theory suggests that consumers in all nations can consume more if there are no restrictions on trade.
FALSE

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-3
Topic: Comparative Advantage
 

19. (p. 170) Ricardo's theory is so powerful that it remains a major intellectual weapon for advocates of free trade.
TRUE

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-3
Topic: Comparative Advantage
 

20. (p. 170-171) Nobel Prize-winning economist Paul Samuelson argued that contrary to the standard interpretation, in certain circumstances the theory of comparative advantage predicts that a rich country might actually be worse off by switching to a free trade regime with a poor country.
TRUE

AACSB: Reflective thinking
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-3
Topic: Comparative Advantage
 

21. (p. 171) Embracing a free trade regime for an advanced economy often implies that the country will produce less of some labor-intensive goods and more of some knowledge-intensive goods,
TRUE

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-3
Topic: Comparative Advantage
 

22. (p. 172) The comparative advantage model assumed that trade does not change a country's stock of resources or the efficiency with which it utilizes those resources.
TRUE

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-3
Topic: Comparative Advantage
 

23. (p. 174) A study over the 1950-1998 period revealed that countries that liberalized their trade regimes experienced, on average, increases in their annual growth rates of 15 percent compared to preliberalization times.
FALSE

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-3
Topic: Comparative Advantage
 

24. (p. 175) Despite the short-term adjustment costs associated with adopting a free trade regime, trade would seem to produce a greater economic growth and higher living standards in the long run, just as Ricardo's theory leads us to expect.
TRUE

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-3
Topic: Comparative Advantage
 

25. (p. 176) Factor endowments refer to the extent to which a country is endowed with such factors as land, labor, and capital.
TRUE

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-2
Topic: Heckscher-Ohlin Theory
 

26. (p. 176) The Heckscher-Ohlin theory would predict that the United States should be a primary importer of capital goods.
FALSE

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-2
Topic: Heckscher-Ohlin Theory
 

27. (p. 176) The Heckscher-Ohlin theory has been one of the least influential in international economics.
FALSE

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-2
Topic: Heckscher-Ohlin Theory
 

28. (p. 176) Most economists prefer the Heckscher-Ohlin theory to Ricardo's theory because it makes fewer simplifying assumptions and it has been subjected to many empirical tests.
TRUE

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-2
Topic: Heckscher-Ohlin Theory
 

29. (p. 177) Wassily Leontief's theory of the product life-cycle was based on the observation that for most of the 20th century, a very large proportion of the world's new products were developed by foreign nations and sold in the U.S. market.
FALSE

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-2
Topic: The Product Life-Cycle Theory
 

30. (p. 177) Vernon argued that early in the life cycle of a typical new product, while demand is starting to grow rapidly in the United States, demand in other advanced countries is available to all income groups.
FALSE

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-2
Topic: The Product Life-Cycle Theory
 

31. (p. 178) Historically, the product life-cycle theory seems not to be an accurate explanation of international trade patterns.
FALSE

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-2
Topic: The Product Life-Cycle Theory
 

32. (p. 178) Viewed from an Asian or European perspective, Vernon's argument that most new products are developed and introduced in the United States is ethnocentric.
TRUE

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-2
Topic: The Product Life-Cycle Theory
 

33. (p. 180) The new trade theory began to emerge in the 1970s when a number of economists pointed out that the ability of firms to attain economies of scale might have important implications for international trade.
TRUE

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-2
Topic: New Trade Theory
 

34. (p. 180) In industries where economies of scale are important, both the variety of goods that a country can produce and the scale of production are limited by the size of the market.
TRUE

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-3
Topic: New Trade Theory
 

35. (p. 184) In sum, Porter's argument is that the degree to which a nation is likely to achieve international success in a certain industry is a function of the combined impact of factor endowments, domestic demand conditions, related and supporting industries, and lack of domestic rivalry.
FALSE

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-4
Topic: National Competitive Advantage: Porter's Diamond
 

36. (p. 185) According to Porter, advanced factors are the most significant for competitive advantage.
TRUE

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-2
Topic: National Competitive Advantage: Porter's Diamond
 

37. (p. 188) According to Michael Porter, factor endowments can be affected by subsidies, policies toward capital markets, and policies toward education.
TRUE

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-4
Topic: National Competitive Advantage: Porter's Diamond
 

38. (p. 189) The individual firm should invest substantial financial resources in trying to build a first-mover, even if that means several years of losses before a new venture becomes profitable.
TRUE

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-5
Topic: Focus on Managerial Implications
 

39. (p. 189) Because of their pivotal role in international trade, businesses are at the mercy of government trade policy.
FALSE

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-5
Topic: Focus on Managerial Implications
 

40. (p. 190) According to Porter's theory of national competitive advantage, a firm should invest in upgrading advanced factors of production because it is in the best interest of business for a firm to do so.
TRUE

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-5
Topic: Focus on Managerial Implications
 

Multiple Choice Questions
 

41. (p. 161) Which of the following is best identified by saying it is the absence of government-imposed barriers to the free flow of goods and services between countries?
A. Free trade
B. Mercantilism
C. Socialism
D. Market system

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-1
Topic: An Overview of Trade Theory
 

42. (p. 161) _____ refers to a situation where a government does not attempt to influence through quotas or duties what its citizens can buy from another country or what they can produce and sell to another country.
A. Mercantile trade
B. Free trade
C. Clear commerce
D. Unencumbered commerce

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-1
Topic: An Overview of Trade Theory
 

43. (p. 161) David Ricardo advanced the:
A. new trade theory.
B. product life-cycle theory.
C. comparative advantage theory.
D. factor endowment theory.

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-1
Topic: An Overview of Trade Theory
 

44. (p. 161) The theory of comparative advantage, advanced by _____, is the intellectual basis of the modern argument for unrestricted free trade.
A. Michael Porter
B. David Ricardo
C. Bertil Ohlin
D. Adam Smith

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-1
Topic: An Overview of Trade Theory
 

45. (p. 162) How do countries' economies gain from international trade?
A. Country can specialize in the manufacturing of products that are produced most efficiently in other countries.
B. Citizens should buy only those products that are produced domestically.
C. Since it is of interest to domestic producers, countries benefit from international trade.
D. Countries can import products that can be produced more efficiently in other countries.

AACSB: Analytic
BT: Knowledge
Difficulty: Medium
Learning Objective: 5-1
Topic: An Overview of Trade Theory
 

46. (p. 162) With their future threatened by imports, _____ textile companies and their employees have tried hard to persuade the government to limit the importation of textiles by demanding quotas and tariffs.
A. Chinese
B. Indian
C. Japanese
D. U.S.

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-1
Topic: An Overview of Trade Theory
 

47. (p. 162-163) Climate and natural resource endowments explain why all of the following happen EXCEPT:
A. Brazil exports coffee.
B. Iceland exports oranges.
C. China exports crawfish.
D. Saudi Arabia exports oil.

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-1
Topic: An Overview of Trade Theory
 

48. (p. 164) Propagated in the 16th and 17th centuries, _____ advocated that countries should simultaneously encourage exports and discourage imports.
A. ethnocentrism
B. capitalism
C. collectivism
D. mercantilism

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-2
Topic: Mercantilism
 

49. (p. 164) Which of the following statements most accurately captures the main tenet of mercantilism?
A. It is in a country's best interests to not export products to less developed countries.
B. It is in a country's best interests to import products that are most efficiently produced at home.
C. It is in a country's best interests to import less specialized goods than to attempt to make them at home.
D. It is in a country's best interests to maintain a trade surplus, to export more than it imports.

AACSB: Reflective thinking
BT: Comprehension
Difficulty: Medium
Learning Objective: 5-2
Topic: Mercantilism
 

50. (p. 164) Considered to be the first theory of international trade, _____ principal assertion was that gold and silver were the mainstays of national wealth and essential to vigorous commerce.
A. collectivism's
B. mercantilism's
C. capitalism's
D. economic conservatism's

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-2
Topic: Mercantilism
 

51. (p. 164) Which of the following is NOT consistent with the central beliefs of mercantilism?
A. Government should intervene to achieve a surplus in the balance of trade.
B. Policies should be put in place to minimize exports and maximize imports.
C. Imports should be limited by tariffs and quotas.
D. Exports should be subsidized.

AACSB: Analytic
BT: Knowledge
Difficulty: Medium
Learning Objective: 5-2
Topic: Mercantilism
 

52. (p. 165) The flaw with mercantilism was that it viewed trade as a:
A. zero-sum game.
B. mutually beneficial activity.
C. nonessential economic activity.
D. threat to a government's independence.

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-2
Topic: Mercantilism
 

53. (p. 165) A situation in which a gain by one party results in a loss by another is called:
A. economic independence.
B. an unrestricted trade.
C. a zero-sum game.
D. trade surplus.

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-2
Topic: Mercantilism
 

54. (p. 165) The theory of _____ was advanced by Adam Smith.
A. absolute advantage
B. comparative advantage
C. new trade
D. mercantilism

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-2
Topic: Absolute Advantage
 

55. (p. 165) A country is noted as having a(n) _____ in the production of a product when it is more efficient than any other country in producing that product.
A. comparative advantage
B. consumer advantage
C. competitive advantage
D. absolute advantage

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-2
Topic: Absolute Advantage
 

56. (p. 165) According to Smith, countries should specialize in the production of goods for which they have an absolute advantage and then:
A. retain these goods for strictly domestic sales.
B. trade these goods for the goods produced by other countries.
C. sell these goods to the highest domestic or international bidder.
D. prohibit the import of these goods from other countries.

AACSB: Reflective thinking
BT: Comprehension
Difficulty: Medium
Learning Objective: 5-2
Topic: Absolute Advantage
 

57. (p. 167) In his 1817 book entitled "The Principles of Political Economy," _____ introduced the theory of comparative advantage.
A. Adam Smith
B. David Ricardo
C. Raymond Vernon
D. Max Weber

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-2
Topic: Comparative Advantage
 

58. (p. 167-168) A situation in which a country specializes in producing the goods it produces most efficiently and buys the products it produces less efficiently from other countries, even if it could produce the good more efficiently itself is referred to as:
A. comprehensive advantage.
B. pertinent advantage.
C. comparative advantage.
D. absolute advantage.

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-2
Topic: Comparative Advantage
 

59. (p. 170) To an even greater degree than the theory of absolute advantage, the theory of _____ suggests that trade is a positive-sum game in which all gain.
A. total advantage
B. mercantilism
C. comparative advantage
D. paradoxical advantage

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-3
Topic: Comparative Advantage
 

60. (p. 170) _____ theory suggests that consumers in all nations can consume more if there are no restrictions on trade.
A. Porter's
B. Vernon's
C. Samuelson's
D. Ricardo's

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-3
Topic: Comparative Advantage
 

61. (p. 170) Comparative advantage is based on assuming away:
A. the effects of trade on income distribution within a country.
B. constant returns to scale.
C. that the resources can move freely from the production of one good to another.
D. that free trade does not change the efficiency with which the countries use their resources.

AACSB: Reflective thinking
BT: Comprehension
Difficulty: Medium
Learning Objective: 5-3
Topic: Comparative Advantage
 

62. (p. 170-171) _____ argued that contrary to the standard interpretation, in certain circumstances the theory of comparative advantage predicts that a rich country might actually be worse off by switching to a free trade regime with a poor nation.
A. Raymond Vernon
B. Andrew Warner
C. Paul Samuelson
D. Jeffery Sachs

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-3
Topic: Comparative Advantage
 

63. (p. 171) Which of the following is an issue with the ‘constant returns to specialization' assumption?
A. Constant returns to specialization imply a concave PPF.
B. Constant returns to specialization suggest that the gains from specialization are likely to be exhausted before specialization is complete.
C. It is feasible for a country to specialize to a point where the resulting gains from trade are outweighed by diminishing returns.
D. Resources are of different quality and hence more units are required to produce each additional unit.

AACSB: Reflective thinking
BT: Comprehension
Difficulty: Medium
Learning Objective: 5-3
Topic: Comparative Advantage
 

64. (p. 171) In comparative advantage, the assumption is that resources can move freely from production of one good to another. Why is this assumption unrealistic?
A. The process of shifting resources from one good to another eliminates human suffering.
B. The benefit of free trade is much lesser compared to the cost of shifting resources.
C. The process of moving resources causes friction and human suffering.
D. Resources move easily from one economic activity to the other.

AACSB: Reflective thinking
BT: Comprehension
Difficulty: Medium
Learning Objective: 5-3
Topic: Comparative Advantage
 

65. (p. 171) The gains from trade once the transition toward free trade has been made:
A. eliminates human suffering.
B. causes resources to easily shift between economic activities.
C. is lesser than the cost of shifting resources.
D. are both significant and enduring.

AACSB: Reflective thinking
BT: Comprehension
Difficulty: Medium
Learning Objective: 5-3
Topic: Comparative Advantage
 

66. (p. 173) What would be the consequences of dynamic gains in both the stock of a country's resources and the efficiency with which resources are utilized?
A. It will cause the country's PPF to be in a bell-shaped curve.
B. The country can produce more goods than it did before free trade.
C. Dynamic gains would lead to an outcome that is beneficial under all circumstances.
D. The country will achieve constant returns to specialization.

AACSB: Reflective thinking
BT: Comprehension
Difficulty: Medium
Learning Objective: 5-3
Topic: Comparative Advantage
 

67. (p. 173) What was Samuelson's criticism of free trade?
A. He argued that in some circumstances, dynamic gains can lead to an outcome that is beneficial for the country.
B. He argued that offshoring service jobs that were traditionally mobile will increase the market clearing wage rate.
C. He favored introducing protectionist measures to guard against the theoretical harmful effects of free trade.
D. He argued that being able to purchase groceries 20 percent cheaper at Wal-Mart does not necessarily make up for the wage losses.

AACSB: Reflective thinking
BT: Comprehension
Difficulty: Medium
Learning Objective: 5-3
Topic: Comparative Advantage
 

68. (p. 174) _____ and _____ created a measure of how open to international trade an economy was and then looked at the relationship between openness and economic growth for a sample of more than 100 countries from 1970 to 1990.
A. Ricardo; Smith
B. Warner; Sachs
C. Porter; Vernon
D. Samuelson; Ohlin

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-3
Topic: Comparative Advantage
 

69. (p. 176) According to the Heckscher-Ohlin theory, the pattern of international trade is determined by differences in:
A. productivity.
B. political interests.
C. factor endowments.
D. national priorities.

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-2
Topic: Heckscher-Ohlin Theory
 

70. (p. 176) The Heckscher-Ohlin theory:
A. argued that comparative advantage arises from differences in national factor endowments.
B. argues that differences in labor productivity between nations underlie the notion of comparative advantage.
C. predicts that countries will import goods that make intensive use of factors that are locally abundant.
D. is less favored than Ricardo's theory because it makes many simplifying assumptions.

AACSB: Reflective thinking
BT: Comprehension
Difficulty: Medium
Learning Objective: 5-2
Topic: Heckscher-Ohlin Theory
 

71. (p. 176) Which theory predicts that countries will export those goods that make intensive use of those factors that are locally abundant, while importing goods that make intensive use of factors that are locally scarce?
A. Smith-Ricardo
B. Vernon-Samuelson
C. Heckscher-Ohlin
D. Carrier-Roller

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-2
Topic: Heckscher-Ohlin Theory
 

72. (p. 176) Which of the following statements is a fair comparison of the Heckscher-Ohlin theory and the Ricardo theory of free trade?
A. Both theories argue that the pattern of international trade is determined by currency exchange rates.
B. Unlike Ricardo's theory, the Heckscher-Ohlin theory argues that the pattern of international trade is determined by differences in factor endowments, rather than differences in productivity.
C. Both theories argue that the pattern of international trade is determined by constant returns to specialization.
D. Unlike the Heckscher-Ohlin theory, Ricardo's theory makes fewer simplifying assumptions.

AACSB: Reflective thinking
BT: Comprehension
Difficulty: Medium
Learning Objective: 5-2
Topic: Heckscher-Ohlin Theory
 

73. (p. 176) According to the text, most economists prefer the Heckscher-Ohlin theory to Ricardo's theory because:
A. it makes fewer simplifying assumptions.
B. it predicts trade patterns with greater accuracy.
C. Ricardo's theory is less accurate due to the Leontief paradox.
D. many of the empirical tests have raised questions about the validity of Ricardo's theory.

AACSB: Reflective thinking
BT: Comprehension
Difficulty: Medium
Learning Objective: 5-2
Topic: Heckscher-Ohlin Theory
 

74. (p. 176) The Heckscher-Ohlin theory has a(n) _____ appeal.
A. political
B. commonsense
C. economic
D. cost efficiency

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-2
Topic: Heckscher-Ohlin Theory
 

75. (p. 176) Contrary to what the Heckscher-Ohlin theory would predict, the United States has been a primary importer rather than an exporter of capital goods. This phenomenon is referred to as the _____ paradox.
A. Theler
B. Leontief
C. Cormier
D. Ricardo

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-2
Topic: Heckscher-Ohlin Theory
 

76. (p. 176) What is a possible explanation for observing the Leontief paradox?
A. The U.S. imports goods that heavily use skilled labor and innovative entrepreneurship.
B. The U.S. has a special advantage in producing new products made with innovative technologies.
C. The U.S. exports heavy manufacturing products that use large amounts of capital.
D. The U.S. has a strong absolute advantage over all other foreign nations because of its resource capabilities.

AACSB: Reflective thinking
BT: Comprehension
Difficulty: Medium
Learning Objective: 5-2
Topic: Heckscher-Ohlin Theory
 

77. (p. 176) Of the following, whose theory predicted that countries would export goods that make intensive use of factors that are locally abundant while importing goods that make intensive use of factors that are locally scarce?
A. Ricardo
B. Porter
C. Leontief
D. Heckscher-Ohlin

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-2
Topic: Heckscher-Ohlin Theory
 

78. (p. 176) The _____ occurred due to the findings that U.S. exports were less capital-intensive than U.S. imports.
A. theory of rising costs
B. Leontief paradox
C. theory of comparative advantage
D. diminishing returns to specialization

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-2
Topic: Heckscher-Ohlin Theory
 

79. (p. 177) David Ricardo's theory of comparative advantage attempts to rationalize why some countries export automobiles, consumer electronics, and machine tools, while other countries export chemicals, watches, and jewelry. This rationalization is best explained in terms of:
A. absolute advantage in terms of resources.
B. international differences in labor productivity.
C. the proportions in which the factors of production are available.
D. the cultural histories of the exporting nations.

AACSB: Reflective thinking
BT: Comprehension
Difficulty: Medium
Learning Objective: 5-2
Topic: Heckscher-Ohlin Theory
 

80. (p. 177) Raymond Vernon proposed the product life cycle in the mid-1960s. Vernon argued that two factors gave the U.S. firms a strong incentive to develop new consumer products. These two factors were _____ and:
A. low cost; number of industries.
B. market size; types of competitors.
C. wealth; size of the U.S. market.
D. low income groups; low cost of U.S. labor.

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-2
Topic: The Product Life-Cycle Theory
 

81. (p. 177) Vernon's product life-cycle theory was based on the observation that for most of the 20th century, a very large proportion of the world's new products had been developed by U.S. firms and sold first in the _____ market.
A. Japanese
B. Western European
C. U.S.
D. Canadian

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-2
Topic: The Product Life-Cycle Theory
 

82. (p. 177) Vernon argues that early in the life cycle of a typical new product, while demand is starting to grow rapidly in the United States, demand in other advanced countries:
A. remains limited to high income groups.
B. necessitates imports to the U.S.
C. attracts manufacturing possibilities.
D. limits exports from U.S.

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-2
Topic: The Product Life-Cycle Theory
 

83. (p. 178) As the market in the U.S. and other advanced nations matures, the product becomes more standardized and price becomes:
A. governmentally regulated.
B. greater.
C. unimportant.
D. the main competitive weapon.

AACSB: Analytic
BT: Knowledge
Difficulty: Medium
Learning Objective: 5-2
Topic: The Product Life-Cycle Theory
 

84. (p. 178) Which of the following has historically been noted as being an accurate explanation for international trade patterns?
A. Product life-cycle theory
B. Absolute advantage theory
C. Competitive advantage theory
D. Heckscher-Ohlin theory

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-2
Topic: The Product Life-Cycle Theory
 

85. (p. 178) According to the text, historically the product-life-cycle theory is a(n):
A. relevant theory in the modern world.
B. accurate explanation of international trade patterns.
C. example of culturally relative theories.
D. without any weakness.

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-2
Topic: The Product Life-Cycle Theory
 

86. (p. 178) Which of the following theories might better explain why certain components are produced in certain locations and why the final product is assembled elsewhere?
A. New trade
B. Comparative advantage
C. Heckscher-Ohlin
D. Product life-cycle

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-2
Topic: The Product Life-Cycle Theory
 

87. (p. 180) The _____ theory began to emerge in the 1970s when some economists pointed out the ability of firms to attain economies of scale might have important implications for international trade.
A. balanced trade
B. Heckscher-Ohlin
C. new trade
D. product life-cycle

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-2
Topic: New Trade Theory
 

88. (p. 180) _____ are unit cost reductions associated with a large scale of output.
A. Comparative advantages
B. Factor endowments
C. Economies of scale
D. Diminishing returns

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-2
Topic: New Trade Theory
 

89. (p. 180) Because of substantial economies of scale, the _____ theory argues that trade can increase the variety of goods available to consumers.
A. comparative advantage
B. product life-cycle
C. new trade
D. Heckscher-Ohlin

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-2
Topic: New Trade Theory
 

90. (p. 180) Which of the following theories argues that due to the presence of substantial scale economies, world demand will support only a few firms in many industries?
A. Heckscher-Ohlin
B. Leontief's paradox
C. Product life-cycle
D. New trade

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-2
Topic: New Trade Theory
 

91. (p. 180) The new trade theory points out that through its impact on economies of scale, trade can increase the variety of goods available to consumers and:
A. reduce the volume of the goods produced.
B. eliminate competition.
C. lower the costs of the goods.
D. reduce the quality of the goods produced.

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-3
Topic: New Trade Theory
 

92. (p. 180) If a national market is small, there may not be enough demand to enable producers to realize _____ for certain products.
A. high volumes
B. economies of scale
C. low unit costs
D. competitive pricing

AACSB: Analytic
BT: Comprehension
Difficulty: Medium
Learning Objective: 5-3
Topic: New Trade Theory
 

93. (p. 181) Which of the following is NOT an indicator of why trade is considered to be mutually beneficial to those involved in it?
A. It allows for specialization.
B. It allows for production of products at higher prices.
C. It affords realization of scale economies.
D. It affords production of a larger variety of products.

AACSB: Reflective thinking
BT: Comprehension
Difficulty: Medium
Learning Objective: 5-3
Topic: New Trade Theory
 

94. (p. 181) The economic and strategic advantages that accrue to early entrants in an industry are called:
A. first-mover advantages.
B. comparative advantages.
C. factor endowment advantages.
D. first-stage benefits.

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-3
Topic: New Trade Theory
 

95. (p. 181) What of the following is an advantage that first-movers enjoy?
A. Benefit from a high cost structure.
B. A zero-sum game due to lack of competition.
C. Capture scale economies ahead of later entrants.
D. Increase trade barriers.

AACSB: Reflective thinking
BT: Comprehension
Difficulty: Medium
Learning Objective: 5-3
Topic: New Trade Theory
 

96. (p. 181) According to the new trade theory, firms that establish a(n) _____ advantage with regard to the production of a particular new product may subsequently dominate global trade in that product.
A. comparative
B. late entrant
C. first-mover
D. constant return

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-3
Topic: New Trade Theory
 

97. (p. 182) The new trade theory is at variance with the _____ theory, which suggests that a country will predominate in the export of a product when it is particularly well endowed with those factors used intensively in its manufacture.
A. Heckscher-Ohlin
B. product life-cycle
C. comparative advantage
D. Ricardo-Smith

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-3
Topic: New Trade Theory
 

98. (p. 183) In terms of first-mover advantages and international trade, who conducted a study suggestive of the existence of first-mover advantages as an important factor in explaining the dominance of firms from certain nations in specific industries?
A. Alfred Chandler
B. Michael Porter
C. Adam Smith
D. Hawker Siddley

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-4
Topic: New Trade Theory
 

99. (p. 183) Considered by some to be the most contentious implication of the new trade theory is that it generates an argument for _____ and ______.
A. high cost production; high import tariffs.
B. high volume production; low variety of goods.
C. weak export; entrepreneurship.
D. government intervention; strategic trade policy.

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-4
Topic: New Trade Theory
 

100. (p. 183) The theory of _____, developed by Michael Porter, focuses on determining why some nations succeed and others fail in international competition.
A. new trade
B. absolute advantage
C. comparative advantage
D. national competitive advantage

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-2
Topic: National Competitive Advantage: Porter's Diamond
 

101. (p. 183) What was the essential task of Michael Porter's national competitive advantage?
A. How do nations use their resources efficiently?
B. Why does a nation achieve international success in a particular industry?
C. How do countries gain first-mover advantages?
D. Why has a large proportion of the world's new products been developed by U.S. firms and sold first in the U.S. market?

AACSB: Reflective thinking
BT: Comprehension
Difficulty: Medium
Learning Objective: 5-2
Topic: National Competitive Advantage: Porter's Diamond
 

102. (p. 184) Porter's suggested four attributes making up the "diamond" consist of factor endowments, relating and supporting industries, firm strategy and structure, and:
A. competitive advantage.
B. mercantilism.
C. constant returns to specialization.
D. demand conditions.

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-2
Topic: National Competitive Advantage: Porter's Diamond
 

103. (p. 184) Which of the following indicate the presence or absence of supplier industries and related industries that are internationally competitive?
A. Factor endowments
B. Firm's structure and rivalry
C. Relating and supporting industries
D. Demand conditions

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-2
Topic: National Competitive Advantage: Porter's Diamond
 

104. (p. 184) According to Porter's diamond, a nation's position in factors of production such as skilled labor or the infrastructure necessary to compete in a given industry is best referred to as:
A. capitalization.
B. diminishing returns.
C. factor endowments.
D. relating industries.

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-2
Topic: National Competitive Advantage: Porter's Diamond
 

105. (p. 184) Porter's thesis was that four broad attributes of a nation shape the environment in which local firms compete, and that these attributes promote or impede the creation of competitive advantage. All of the following are attributes EXCEPT:
A. factor endowments.
B. first-mover advantages.
C. firm strategy, structure, and rivalry.
D. relating and supporting industries.

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-2
Topic: National Competitive Advantage: Porter's Diamond
 

106. (p. 184) Porter maintains that two additional variables can influence the national diamond in important ways. These two variables are _____ and ______.
A. entrepreneurship, strategic trade policies.
B. trade shortage, high import tariffs.
C. absolute advantage; PPF.
D. chance; government.

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-2
Topic: National Competitive Advantage: Porter's Diamond
 

107. (p. 185) In the context of factor endowments, which of the following are considered to be classed as advanced factors?
A. Demographics
B. Climate and location
C. Natural resources
D. Skilled labor

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-2
Topic: National Competitive Advantage: Porter's Diamond
 

108. (p. 185) Porter argued that in terms of factor endowments, _____ factors are the most significant for competitive advantage in his study dealing with the competitive advantage of nations.
A. constant
B. basic
C. advanced
D. complementary

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-2
Topic: National Competitive Advantage: Porter's Diamond
 

109. (p. 185) Porter argues that a nation's firms gain competitive advantage if their domestic consumers are _____ and _______.
A. sophisticated; demanding.
B. ethnocentric; rich.
C. accommodating; uneducated.
D. low skilled; nationalist.

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-2
Topic: National Competitive Advantage: Porter's Diamond
 

110. (p. 185) Michael Porter emphasizes the role home demand plays in upgrading:
A. competitive advantage.
B. factor endowment.
C. constant returns to specialization.
D. production possibility frontier.

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-2
Topic: National Competitive Advantage: Porter's Diamond
 

111. (p. 185) Unlike the naturally endowed basic factors, advanced factors are a product of investment by all of the following EXCEPT:
A. companies.
B. governments.
C. demographics.
D. individuals.

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-2
Topic: National Competitive Advantage: Porter's Diamond
 

112. (p. 187) In Porter's model of competitive advantage, the fourth broad attribute is the strategy, structure, and rivalry of firms within a nation. Porter suggested that there is a strong association between _____ and the creation and persistence of competitive advantage in an industry.
A. inflation
B. vigorous domestic rivalry
C. new government regulations and higher taxes
D. new product development

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-2
Topic: National Competitive Advantage: Porter's Diamond
 

113. (p. 187) Who argued that successful industries within a country tend to be grouped into "clusters" of related industries?
A. Porter
B. Vernon
C. Ricardo
D. Heckscher

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-2
Topic: National Competitive Advantage: Porter's Diamond
 

114. (p. 187-188) Porter argues that the presence of all components is usually required for the "diamond" to boost:
A. international recognition.
B. competitive performance.
C. corporate social responsibility.
D. employee morale.

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-4
Topic: National Competitive Advantage: Porter's Diamond
 

115. (p. 188) We would expect Porter's model to predict _____, if he is correct.
A. currency exchange rates
B. membership in the WTO
C. the pattern of international trade
D. factor endowments

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-4
Topic: National Competitive Advantage: Porter's Diamond
 

116. (p. 189) According to the new trade theory, firms that establish a(n) _____ advantage in terms of the production of a particular new product may subsequently dominate global trade in that product.
A. competitive
B. comparative
C. absolute
D. first-mover

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-5
Topic: Focus on Managerial Implications
 

117. (p. 189) The manufacture of standard electronic components is a _____ process requiring semi-skilled labor.
A. low cost
B. capital-intensive
C. labor-intensive
D. first-mover advantage

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-5
Topic: Focus on Managerial Implications
 

118. (p. 189) Because of their pivotal role in international trade, _____ can exert a strong influence on government trade policies.
A. individual citizens
B. voluntary organizations
C. unions
D. businesses

AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 5-5
Topic: Focus on Managerial Implications
 

119. (p. 190) Porter's theory of national competitive advantage suggests that it is in the best interest of business for a firm to invest in upgrading advanced factors of production. The means for accomplishing this include all of the following EXCEPT:
A. increase research and development activities.
B. provide better training for employees.
C. adopt policies that eliminate competition.
D. develop methods to improve the skill levels of workers.

AACSB: Reflective thinking
BT: Comprehension
Difficulty: Medium
Learning Objective: 5-5
Topic: Focus on Managerial Implications
 

120. (p. 190) According to Porter's theory, governments should be urged to _____ that will have a favorable impact on each component of the national diamond.
A. increase trade barriers
B. favor unionization
C. adopt policies
D. restrict import

AACSB: Analytic
BT: Comprehension
Difficulty: Medium
Learning Objective: 5-5
Topic: Focus on Managerial Implications
 

Essay Questions
 

121. (p. 161, 164) What is meant by the term "free trade"? Was Adam Smith an advocate or critic of free trade? Is free trade compatible with the concept of mercantilism? 

Free trade refers to a situation where a government does not attempt to influence through quotas or duties what its citizens can buy from another country or what they can produce and sell to another country. This concept was supported by Adam Smith, who argued that the "invisible hand" of the market mechanism, rather than government policy, should determine what a country imports and what it exports. The concept of mercantilism is not compatible with the concept of free trade. The main tenet of mercantilism is that it is in a country's best interests to maintain a trade surplus by exporting more than it imports. Consistent with this belief, the mercantilist doctrine advocated government intervention to achieve a surplus in the balance of trade.

AACSB: Reflective thinking
BT: Comprehension
Difficulty: Medium
Learning Objective: 5-1
Learning Objective: 5-2
Topic: An Overview of Trade Theory, Mercantilism
 

122. (p. 161) When does free trade occur? 

Free trade occurs when a government does not attempt to influence through quotas or duties what its citizens can buy from another country or what they can produce and sell to another country.

AACSB: Reflective thinking
BT: Comprehension
Difficulty: Easy
Learning Objective: 5-1
Topic: An Overview of Trade Theory
 

123. (p. 165) Describe Adam Smith's concept of absolute advantage. 

According to Smith, countries should specialize in the production of goods for which they have an absolute advantage and then trade those goods for the goods produced by other countries. For instance, during Smith's time, England had an absolute advantage in the production of textiles, and France had an absolute advantage in the production of wine. According to the concept of absolute advantage, it then only makes sense for England to produce textiles (and export them to France), and France to produce wine (and export it to England). Smith's basic argument, therefore, was that a country should never produce goods at home that it can buy at a lower cost from other countries. Moreover, Smith argued that by specializing in the production of goods in which each has an absolute advantage, both countries benefit by engaging in trade.

AACSB: Reflective thinking
BT: Comprehension
Difficulty: Medium
Learning Objective: 5-2
Topic: Absolute Advantage
 

124. (p. 176) Describe the Heckscher-Ohlin theory of international trade. 

The Heckscher-Ohlin theory predicts that countries will export those goods that make intensive use of those factors that are locally abundant, while importing goods that make intensive use of factors that are locally scarce. Thus, the Heckscher-Ohlin theory attempts to explain the pattern of international trade that we see in the world economy. The Heckscher-Ohlin theory is consistent with the notion of free trade. It also has commonsense appeal, and there are many examples of international commerce that are supportive of the theory.

AACSB: Reflective thinking
BT: Comprehension
Difficulty: Medium
Learning Objective: 5-2
Topic: Heckscher-Ohlin Theory
 

125. (p. 177) Describe the central tenant of the product life-cycle theory. 

Raymond Vernon initially proposed the product life-cycle theory in the mid-1960s. Vernon's theory was based on the observation that for most of the 20th century a very large proportion of the world's new products had been developed by U.S. firms and sold first in the U.S. market. It could be produced abroad at some low-cost location and then exported back into the United States. Vernon went on to argue that early in the life cycle of a typical new product, while demand is starting to grow rapidly in the United States, demand in other advanced countries is limited to high-income groups. The limited initial demand in other advanced countries does not make it worthwhile for firms in those countries to start producing the new product, but it does necessitate some exports from the United States to those countries. Over time, demand for the new product grows in other advanced countries (e.g., Great Britain, France, Germany, and Japan). As it does, it becomes worthwhile for foreign producers to begin producing for their home markets.

AACSB: Reflective thinking
BT: Comprehension
Difficulty: Medium
Learning Objective: 5-2
Topic: The Product Life-Cycle Theory
 

126. (p. 180, 182) Describe the new trade theory. How does the new trade theory help us understand why the United States is dominant in the world market for commercial aircraft exports? 

New trade theory makes two important points: First, through its impact on economies of scale, trade can increase the variety of goods available to consumers and decrease the average costs of those goods. Second, in those industries when the output required to attain economies of scale represents a significant proportion of total world demand, the global market may be able to support only a small number of enterprises. Thus, world trade in certain products may be dominated by countries whose firms were first movers in their production. In such industries, firms that enter the market first build a competitive advantage that is difficult to challenge. Thus, the observed pattern of trade between nations may in part be due to the ability of firms to capture first-mover advantages.
New trade theorists argue that the United States is a major exporter of commercial jet aircraft not because it is better endowed with the factors of production required to manufacture aircraft, but because one of the first movers in the industry, Boeing, was a U.S. firm. This dominance is further reinforced because global demand may not be sufficient to profitably support another producer of midsized and large jet aircraft in the industry.

AACSB: Reflective thinking
BT: Comprehension
Difficulty: Medium
Learning Objective: 5-2
Learning Objective: 5-3
Topic: New Trade Theory
 

127. (p. 181) Describe what is meant by first-mover advantages. 

First-mover advantages are the economic and strategic advantages that accrue to early entrants into an industry. The ability to capture scale economies ahead of later entrants, and thus benefit from a lower cost structure, is an important first-mover advantage. New trade theory argues that for those products where economies of scale are significant and represent a substantial proportion of world demand, the first movers in an industry can gain a scale-based cost advantage that later entrants find almost impossible to match.

AACSB: Reflective thinking
BT: Comprehension
Difficulty: Medium
Learning Objective: 5-3
Topic: New Trade Theory
 

128. (p. 184) Identify and describe the four attributes advanced by Porter. What did Porter conclude from his analysis? 

The four attributes identified by Porter are as follows:
Factor Endowments: A nation's position in factors of production such as skilled labor or the infrastructure necessary to compete in a given industry.
Demand Conditions: The nature of home demand for the industry's product or service.
Relating and Supporting Industries: The presence or absence in a nation of supplier industries and related industries that are internationally competitive.
Firm Strategy, Structure, and Rivalry: The conditions in the nation governing how companies are created, organized, and managed and the nature of domestic rivalry.
Porter speaks of these four attributes as constituting the diamond. He argues that firms are most likely to succeed in industries or industry segments where the diamond is most favorable.

AACSB: Reflective thinking
BT: Comprehension
Difficulty: Medium
Learning Objective: 5-2
Topic: National Competitive Advantage: Porter's Diamond
 

129. (p. 188) How does Porter's theory predict patterns in international trade? 

If Porter is correct, we would expect his model to predict the pattern of international trade that we observe in the real world. Countries should be exporting products from those industries where all four components of the diamond are favorable, while importing in those areas where the components are not favorable. Is he correct? We simply do not know. Porter's theory has not been subjected to detailed empirical testing. Much about the theory rings true, but the same can be said for the new trade theory, the theory of comparative advantage, and the Heckscher-Ohlin theory. It may be that each of these theories, which complement each other, explains something about the pattern of international trade.

AACSB: Reflective thinking
BT: Comprehension
Difficulty: Medium
Learning Objective: 5-4
Topic: National Competitive Advantage: Porter's Diamond
 

130. (p. 190) What does Porter's theory mention about policy implications? 

Porter's theory of national competitive advantage also contains policy implications. Porter's theory suggests that it is in the best interest of business for a firm to invest in upgrading advanced factors of production; for example, to invest in better training for its employees and to increase its commitment to research and development. It is also in the best interests of business to lobby the government to adopt policies that have a favorable impact on each component of the national diamond. Thus, according to Porter, businesses should urge government to increase investment in education, infrastructure, and basic research and to adopt policies that promote strong competition within domestic markets.

AACSB: Reflective thinking
BT: Comprehension
Difficulty: Medium
Learning Objective: 5-5
Topic: Focus on Managerial Implications